Most boat buyers will submit an offer through a broker using a purchase and sale agreement, which we explained in my last article about the basic steps of buying a boat. There are many different forms of agreements, but most of them cover the same general terms and conditions. Generally speaking, the agreement covers the legal binding rights and obligations between the parties, but there are certain provisions both the seller and buyer should pay especially close attention to in the contract.
Deemed Acceptance vs. Deemed Rejection
Purchase agreements can differ on how a boat must be accepted or rejected by a buyer. Once the parties agree to a purchase price and sign an agreement, there is typically an agreed-upon time frame in which the buyer has the option to survey and sea-trial the boat. This inspection period typically ends on the accept/reject date, by which time the buyer must make a decision as to whether he wishes to accept or reject the boat. A buyer is locked into a deal once he accepts the boat and risks losing the deposit or possibly more if he backs out, which is why it’s important to pay attention to the specific language in a contract.
There are two types of purchase agreements in the yacht industry: deemed rejection and deemed acceptance. The vast majority of agreements in the United States are deemed-rejection contracts. In other words, the contract will state that the buyer will be deemed to have rejected the vessel if he fails to give timely written notice of its acceptance. In other words, the deal is off and the deposit is returned if the buyer fails to properly accept the boat. On the other hand, deemed-acceptance contracts are the exact opposite. Hence, the buyer is deemed to have accepted the vessel if he fails to specifically reject it in writing. Deemed-acceptance contracts are more common in Europe and other jurisdictions, but we occasionally see them here in the United States or common foreign-flag states such as the British Virgin Islands. Though not as common, failing to recognize that a contract is based on the deemed-acceptance theory can be catastrophic for a buyer, especially if he had planned to reject the boat after the surveys.
A Clear Title is Key
Arguably the most important aspect of a vessel contract is for the seller to provide a clear title, free from any debts, liens, security interests, etc. The agreement should specifically require the seller to transfer the title free from any and all encumbrances and provide proof of removal, if any encumbrances exist. Savvy buyers should request an abstract of title from the National Vessel Documentation Center, which is available only on boats documented with the Coast Guard. The abstract provides a summary of previous transactions and any encumbrances or liens relating to a particular vessel. Any mortgages or claims of lien against the vessel should be addressed prior to closing. Additionally, a contract should request the seller to provide a warranty of title, in which the seller not only guarantees a clear title but also indemnifies and holds the purchaser harmless from any liability resulting from a breach of the warranty. When the seller is an entity, the contract should specifically request the warranty of title or guaranty be from a beneficial owner or principal of the selling entity rather than just the company itself. This is important because the company could be dissolved subsequent to closing and potentially impact the ability of the buyer to recover any losses as a result of a breach.
Know the Seller
If the seller is an entity, a contract should require it to provide the buyer a certificate of good standing and also a document proving the person who signs on behalf of the entity is authorized to do so. A buyer should always be thorough and perform his due diligence when purchasing a vessel or any other asset from an entity. Arguing over what the seller must provide only makes the process more contentious and time‑consuming. Thus, the contract should specify what the seller is required to provide for the buyer’s review so that the parties are on the same page prior to closing.
Read the Contract
Vessel purchase and sale agreements come in many varieties. Though most of them contain the same general terms and conditions, certain provisions can have an impact on the fluidity of the process leading up to closing. The points discussed above are just the tip of the iceberg, but they do provide some insight into a few of the important provisions and how they can impact the parties involved in a boat deal. The best advice one can give is for all parties to actually read and understand the purchase agreement prior to execution.
Raleigh P. Watson is a contributing author, and a Partner at Miller Watson Maritime Attorneys.